Satyam’s Scandal and Near Demise: One Year Later

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January 12, 2010 | Stocks | Author Asif

It has been just over a year since the near demise of the company behind India’s largest corporate fraud, Satyam Computer Service (SAY), a company that at the time provided services to more than a third of Fortune 500 companies. A subscriber asked me about Satyam last week and wanted to find out if I would consider buying the stock. Given that it has been a year since the scandal broke out and the company has started reporting results once again, I figured I would take a closer look at the company.

In case you did not follow Satyam’s saga at the time, here is a timeline of the events that transpired:

  • Dec 16, 2008: Satyam announces a plan to acquire Maytas Properties and Maytas Infrastructure, companies run by the sons of Satyam founder and chairman Ramalinga Raju that are completely unrelated to Satyam’s core software business. Angry investors react by punishing the American Depository Receipts (ADRs) on the NYSE with a 55% loss. The company scraps its acquisition plans in the face of investor backlash and announces the board is instead going to consider a stock buyback program.
  • Dec 23, 2008: The stock drops 13.55% on the Bombay Stock Exchange on rumors that its founder and chairman Ramalinga Raju has resigned from the board. On the same day the World Bank confirms that Satyam was barred from doing all business with the bank for an eight month period last February following allegations of data theft.
  • Jan 7, 2009: Satyam’s founder admits to falsifying accounts stating that the $1.04 billion in assets that the company listed on its balance sheet did not exist and that revenue was 20% lower than reported.
  • Jan 10, 2009:Founder Ramalinga Raju is arrested and sent to prison awaiting trial.
  • Jan 12, 2009: The stock plunges to $1.46 on the NYSE having closed the previous Friday at $9.35 per share. The stock is now down 95% from its 2008 high of $29.10 set less than 8 months ago on May 30, 2008.
  • Apr 2009: Tech Mahindra eventually acquires a 43% stake in Satyam. Tech Mahindra is a subsidiary of Indian automobile company Mahindra & Mahindra, one of Tata Motors (TTM) key competitors and the company that battled Tata Motors to acquire Jaguar and Land Rover from Ford Motor (F).
  • Jun 11, 2009: Satyam’s new chairman Kiran Karnik announces that the near-term revenue outlook was not great and that the company was under severe stress. The stock rises 10% for a third day in a row after results show that the company was still profitable. The NYSE listed ADRs open at $5.20 and hit an intraday high of $5.49 before closing the day at $4.30. The stock slides the rest of the month to end June at $3.11.
  • Nov 13, 2009: Indian infrastructure firm Larsen & Toubro that held a 6.9% stake in the new entity, sold a third of its position for Rs 112.5 ($2.42, based on an exchange rate of $1 = Rs 46.5)
  • Dec 3, 2009: JP Morgan (India) upgrades the stock from neutral to overweight with a price target of Rs 140 ($3.02 based on an exchange rate of $1 = Rs 46.31). JP Morgan analysts expect revenue to decline 36% in Fiscal 2010 (ended March 31, 2010), increase 18% in 2011 and 19% in 2012.
  • Dec 9, 2009: Satyam settles a more than $1 billion patent dispute lawsuit with U.K based Upaid Systems for $70 million. The settlement gives Satyam a royalty-free license of Upaid’s patents. $265 million in lawsuits from 37 companies remain unresolved.

What is the stock actually worth?

Regarding JP Morgan’s forecast, since the Satyam ADRs represent two shares each, the equivalent price target for the US listed ADRs is $6.04, representing a 9.6% upside from the current price of $5.51. The litigation risk that Satyam continues to face combined with a tarnished image and lack of visibility should ideally support a valuation that is at a steep discount of at least 50% to its peers. The last time Satyam reported revenue under US GAAP was back in October 2008 when they reported revenue of $652.2 million. If revenue was indeed inflated 20%, let us assume actual revenue was $543.5 that quarter. Revenue most likely declined after the scandal broke out and at the time Tech Mahindra acquired a stake in Satyam, full year revenue was expected to be $1.3 billion. If Satyam does post $1.3 billion in revenue for fiscal 2010 ending in March 2010, based on its current market cap of $1.86 billion, the stock is trading at 1.43 sales.

With competitors like Wipro (WIT) and Cognizant (CTSH) trading at 5.63 and 4.38 times sales respectively, Satyam is indeed trading at a steep discount to its peers when you look at revenue. However Satyam’s operating margins were 3% when the scandal broke out while Wipro and Cognizant sport operating margins of 17.91% and 18.99% respectively. Unless Tech Mahindra can improve Satyam’s operating margins, which it most likely will, the steep discount appears to be justified. Assuming Satyam does post revenue of $1.3 billion, manages to improve its operating margins to Cognizant’s level, and we apply a 50% discount to Cognizant’s 4.38 times sales valuation, I get a market cap of $2.85 billion for Satyam, representing 53% upside for the stock from current levels provided you are willing you live with the risks, don’t mind the lack of visibility and are hopeful that these assumptions will bear out.

With the Indian economy expected to grow by 7 to 8% for the current fiscal year that ends in March 31, 2009 and a world bank real GDP growth forecast of 8% in 2010 and 8.5% in 2011, India is certainly a favored investment theme. Despite the fundamental reasons for buying into India and the cost cutting in developed countries that has fueled the rise of Indian software companies like Infosys, Wipro and Satyam, the industry does face a number of headwinds in the form of a weak dollar, rising salaries and increased competition from companies like IBM that have developed large operations in India. So along with company specific risk, you also have currency risk and industry risk to consider.

Overall it appears that Satyam might be worth considering as a highly speculative investment that may do well should conditions at the company improve in 2010 and beyond. If JP Morgan’s revenue forecasts for 2011 and 2012 bear out, the stock is a bargain at current levels.

Model Portfolio Update: I am going to close our position in mattress fabric and furniture upholstery maker Culp Inc (CFI) and book gains of approximately 93% in the SINLetter model portfolio. The stock has performed well beyond my expectations since I wrote about it in the November 2009 investment newsletter and taking profits at this point would be prudent. The closing price tomorrow (Jan 13, 2010) will be used as the selling price.

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AOL DailyFinance Review

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June 26, 2009 | Stocks | Author Asif

This was an article I published on the iPhone app review site that I am in the process of launching with some friends and figured I would cross-post it on SINLetter for some light weekend reading, especially for investors who own an iPhone or are considering buying an iPhone.


The siren song that tempted me to switch from using a Blackberry (RIMM) to the iPhone was the native Stocks application on the iPhone. The ability to rapidly scroll through the list of stocks to view quotes and charts was in itself worth the price of admission.

The Internet sun may appear to be setting on AOL, which posted a 20% decline in advertising revenue in the first quarter of 2009 and ranks fourth for financial websites after Yahoo Finance, The Wall Street Journal network and MSN Money. However the DailyFinance app developed by AOL Money & Finance is a brilliant time saving app that is my chosen partner for breakfast every morning. In about 5 minutes it helps me quickly get a read for not only the market but the dozens of stocks I track everyday.

Before switching to the DailyFinance app, I used the native Stocks application for almost two years and then tried out the Bloomberg application for a few weeks. Neither app can hold a candle to the DailyFinance app.

My key frustration with the native iPhone Stocks app was its inability to show news related to the stock I was looking at. The little Yahoo! icon at the bottom left of the app would simply do a web search for the name of the stock and display a bunch of non-finance related results. So if Blackberry maker Research In Motion (RIMM) jumped up by 20%, I would have no idea why unless I looked elsewhere for that information.


RIMM Chart AOL Daily Finance App

In contrast tapping on a stock from the DailyFinance app opens up a screen that displays real time quotes during trading hours and extended hour quotes after the close of the regular session. Income investors would be happy to see dividend and yield information at their fingertips. There are two additional tabs that display news and charts. Oddly enough these two tabs and the dividend information will only show up in portrait mode. Not only does the chart display volume information at the bottom, it also shows the gains in percentage for the time period you select. For example in the screenshot to the right, I am looking at a year-to-date chart of RIMM and it shows that RIMM gained 71.51% since the start of this year despite strong iPhone sales and a very favorable launch for the Palm Pre (PALM) but over a 1 year period the stock has lost 51.35%.

Version 1.2 of the DailyFinance app solved a couple of issues I had with the app. The app used to open by default to the markets section and it took a couple of clicks to get to my Watchlist. The new version is supposed to let you set a default screen to open to but I am yet to find this setting. I am just happy that it opens to the last section I was viewing before quitting the app.

The second issue the latest version solved was the ability to reorder your Watchlist so that you are not restricted to viewing stocks in the order you entered them. As you can see from some of the screenshots below, I have grouped the apartment REITs AvalonBay (AVB), AIMCO (AIV) and Essex Property Trust (ESS) together as well as software-as-a-service (SAAS in industry parlance) providers like NetSuite (N), (CRM), Rightnow Technologies (RNOW) and SuccessFactors (SFSF) together.

AOLDailyFinanceWatchlist AOL DailyFinance Watchlist Edit

The Markets section of the app allows you to stay on top of domestic markets, bonds (10 year treasury note), international markets, currencies (limited to Euro and Yen right now) and commodities (Oil and Gold) from a single page. It would have been cool if the app allowed users to update this section to view commodities of their choice (at this time corn futures interest me more than oil) and also view additional international markets.

AOL DailyFinance Markets

The news section is organized by sector and the movers section allows you to view most active stocks as well as the top gainers/losers of the day. A few things the DailyFinance team could do to improve the app are,

  1. Allow users to share Watchlists with other investors by email.
  2. When adding a stock to the Watchlist or looking up the quote for a stock, automatically bring up the keyboard like the native iPhone Stock app does instead of making users go through the additional step of clicking on the search box to bring up the keyboard.
  3. Allow users to customize the Markets section to suit their preferences.
  4. Let me track multiple watchlists without having to sign on to AOL to create portfolios.

I was about to add “allow users to view charts in landscape mode” to the list when I discovered that the feature already exists and exudes “cool” as you can see below. A well deserved 5 star rating.

Additional Information:

Version Reviewed: 1.2

Release Date: April 17, 2009

Cost: Free

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iRobot: Perfect Recipe for a Short Squeeze

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April 22, 2009 | Stocks | Author Asif

iRobot (IRBT), the company that makes those lovable and sometimes efficient Roomba and Scooba line of robotic vacuum cleaners, reported results that are most likely going to clean out short sellers tomorrow. The company reported results that were 10 cents better than analyst estimates, an increase in gross margins and revenue that only declined 0.9% to $56.9 million in this tough environment.

Sales were buoyed by international Roomba sales, which were up an astounding 69% when compared to the first quarter of 2008. Government and industrial product revenue dropped year-over-year but was offset by home product revenue and government contract revenue. The company posted an adjusted EBITA loss of $0.3 million and operating cash flow of $14.3 million.

The company ended the quarter with $54.74 million in cash (an almost $14 million increase in cash quarter-over-quarter) and no debt. This represents nearly $2.20/share in cash. The stock closed the regular trading session at $8.02 and shot up more than 12% after hours to $9.

Given the low daily volume (average daily volume for the last 10 days was 68,937.5) and a short ratio of 23.81 (2.31 million shares were short as of March 31,2009), the stock appears to be ripe for a short squeeze tomorrow and could be an interesting as a short-term trade. Even without a short squeeze, given that management has reaffirmed its full year 2009 guidance of $290 to $310 million in revenue (flat to slightly lower than 2008) and earnings of break even to 4 cents (break even in 2008), the stock is worthy of consideration for a long position.

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Customer Service ala Twitter Style

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April 16, 2009 | Stocks | Author Asif

Micro-blogging site Twitter has exploded in popularity in recent months and more than doubled its unique visitors in March 2009 to 9.3 million. This is not year-over-year growth or even quarter-over-quarter growth. Twitter increased its traffic 131% from February to March. I knew I had to give it a shot when my barber asked me “What is this twitter thing?”. I created the account @specialsin and got sucked into twittersphere.

A few days ago I came across the twitter page (@windstream) of a company called Windstream Corporation (WIN) and was amazed by how effectively the company was using Twitter to stay in touch with existing customers, help resolve issues and try to sign up new customers. The name also rang a bell. When I checked through my emails I realized that a subscriber had mentioned this rural telecommunications provider to me back in October. He was a Windstream customer and felt that the stock looked attractive when it was trading in the $7 range.

I checked out some of the numbers on Windstream and while I am not too thrilled about the amount of debt the company has on its balance sheet, with a dividend yield of 12.1% and a payout ratio under 60%, the company is worth exploring further.

On the other end of the spectrum from $3.69 billion Windstream is kitchenette, a small San Francisco lunch spot serving “spontaneous organic covert nourishment” that a colleague introduced me to earlier this week. Kitchenette is also using its twitter page (@kitchenettesf) to connect with its customers in innovative ways by releasing its menu (changes daily) to “followers” and by engaging in conversations with its customers through twitter.

Two examples of companies riding the social media wave to connect with customers, improving their top line and hopefully their bottom lines as well.

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Blockbuster (Not) Going Bust

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March 3, 2009 | Stocks | Author Asif

It is often said that turnarounds rarely turn around and earlier today it looked like Blockbuster (BBI) was going to be no exception. The stock, which had already been battered over the course of the last year, declined sharply today to 22 cents before trading was halted on news that the company had hired restructuring specialists Kirkland & Ellis to explore bankruptcy. According to this Forbes article titled Blockbuster Not Bust , the reports of Blockbuster’s demise were a little premature and the company refuted claimed about filing for Chapter 11 bankruptcy. With over $854 million in debt on its balance sheet and only $35 million remaining on a $400 million line of credit, the company was hoping that Kirkland & Ellis would help it refinance some of its loans. The stock rebounded nearly 60% or 13 cents to 35 cents in after hour trading.

The picture for Blockbuster has been bleak for some time now but for a few brief moments it looked like new management at the company might be able to turn the company around. The company posted a 11% improvement in same store sales numbers, cut back on aggressive marketing for its online subscription service, acquired the movie download service Movielink for a fraction of the money spent by the large studios developing it, closed down unprofitable stores, inked a deal with Live Nation to sell concert tickets and even managed to post a profit earlier this fiscal year after several years of red ink.

However with their credit facility coming due in August 2009, the prospects for Blockbuster look grim right now. When I invested in Blockbuster back in mid 2007, I was aware of the fact that the company represented a risky turnaround situation and stated,

“Did I mention that turnaround situations are risky (just ask investors of Gateway (GTW) or Imax (IMAX) who are still waiting for a turnaround) and the company may just as easily go bankrupt. Blockbuster may be best suited for investors who have a healthy appetite for contrarian bets and/or have a diversified portfolio that is anchored by core holdings like Johnson & Johnson (JNJ) and Procter & Gamble (PG).”

It appears that my appetite for Blockbuster and my faith in new management were probably misplaced and I am now looking at a position that has lost most of its value even if it rebounds by a few cents tomorrow. In the third quarter conference call, Blockbuster’s CEO Jim Keyes said,

“While the doubling in our trailing 12 month adjusted EBITDA over the last year puts us in a much, much stronger financial position, we still have nine months to pursue new financing options but we have to have a back up capital plan that if needed would allow us to self fund this business without the use of any additional outside capital.”

Closing the position right now would generate very little capital and I am inclined to retain the stock at least until the fourth quarter results are announced on March 19, 2009. The fourth quarter is traditionally their strongest quarter and there is a possibility that they might still raise the capital they require to continue implementing a strategy that has seen revenue per visit increase 15.4%, net paid rental rate increase 17%, net total revenue per square foot increase 7.6%, gross profit per square foot increase 2.4% and total store revenues improve 16%  year-to-date.

Voluntary Disclosure: I am long Blockbuster in my personal portfolio.

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